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For normal people who don't sleep with the IRS Code under their pillow, here's an easy-to-understand explanation of the Great International Tax Debate currently raging between the Obama administration and U.S. multinationals.

The Obama administration wants to raise taxes on foreign operations of U.S. multinational corporations. The White House argues that favorable tax rules cause U.S. corporations to shift jobs out of the United States to low-tax countries like Ireland and Singapore. In other words, the current U.S. rules kill U.S. jobs. Big business counters that these rules allow U.S. multinationals to compete with foreign multinationals and keep corporate headquarters and research jobs in the United States. (In theory both sides are correct. U.S. tax rules have both a job-killing and a job-creating effect. The reality is that nobody knows which effect is more important--even though advocates on either side always act as if they are certain.)

The administration's proposal is meant to be a compromise between the status quo (with tax benefits for foreign operations) and completely eliminating these benefits (as candidate Obama implied he would do during the campaign). The proposal included in his budget is based on a plan originally proposed by House Ways and Means Committee Chair Charlie Rangel in 2007. Unfortunately, this compromise is extremely complex and its effects vary a great deal depending on each company's individual situation.

Because of the way the proposal operates, the U.S. corporations hit the hardest by the new plan are those with relatively high levels of debt. These companies would lose all the favorable tax treatment for their foreign operations available under current law. There is a lot of variation in company debt levels but one sector with typically high levels of debt is traditional durable goods manufacturing.

At the other end of the spectrum, U.S. multinationals -- like high-tech companies -- with low debt and lots of operations in low-tax countries would pay more tax on their foreign operations but there would still be some tax benefits for offshore operations. However, there is also an unwanted side effect for these firms. They will have a new incentive to keep foreign profits offshore (because under the plan one portion of the tax increase occurs only when profits are brought back to the United States).This is totally contradictory to U.S. interests and U.S. policy, which wants to encourage repatriation of foreign profits that can fund domestic investment and job creation.

It is not easy for companies to know which of these two situations they would face under the new regime. This new proposal puts tremendous pressure on current tax rules never meant to be subject to so much testing -- sort of like a general sending cooks and clerks into the middle of battle. So maybe in practice these rules will bend in favor of taxpayers and the Obama proposal will not have much bite.

Additional uncertainty arises from other sources as well. The Obama proposals have not been spelled out in legislative language so lawyers can only guess about critical details. And even if they did know, they will certainly be subject to change as the proposals wind their way through the legislative process.

The really sad part about all this is that there are other international tax reform proposals which could pretty much achieve the same result -- that is, scaling back current tax benefits for foreign investment -- without all the complexity, without all the uncertainty, and by encouraging rather than discouraging the flow of foreign profits back to the United States.

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